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How to Set Off Input Tax Credit in GST Regime

In our earlier post, we explained about Input Tax Credit (ITC). Now, let’s move ahead and get familiar with how to set off input credit against tax liability in the GST regime. To ensure we are on the same page, you must run-up on the basic fundamentals of GST.

Recap: What is IGST, CGST and SGST?

Since GST subsumed all indirect taxes of central government and state governments (excise duty, service tax, custom duty, VAT, Luxury tax etc), both entities now depend on GST for their indirect tax revenue. GST is a dual concept system composed of two rates, Central GST (CGST) and State GST (SGST). On every transaction within a state, CGST collected will go to the central government and SGST collected will go the concerned state government in which the sale is made. Whenever, a sale is made within a Union territory, UTGST is applied in place of SGST. In case of interstate transactions IGST is applicable (To know more about UTGST, read our post here).

The order in which input credit needs to be set off has been explained in illustration below:-

Please note that outward CGST cannot be compensated with available Input credit of SGST and vice versa. However, both CGST and SGST can be compensated by IGST and vice versa also holds true.

Let us explain the utilization of IGST, CGST and SGST through following 3 examples:

Rhonda Motorcycles is a motorcycle manufacturer based out of Haryana. It procures from its Tier-1 and Tier-2 ancillaries across India, manufactures motorcycles and sells motorcycle and its spare parts to its Dealer across India.

1. Utilization of IGST

Rhonda Motorcycles procures Fuel tank for its motorcycles from its supplier JKM Industries based out of Noida, Uttar Pradesh and Seats from its supplier Classic Seats bases out of Nashik, Maharashtra. Then it sells its motorcycles to its dealer Dev Automobiles based out of Gurgaon, Haryana and spares to its dealer Unique Enterprises in Bangalore, Karnataka.

The detail of transactions effected by Rhonda Motorcycles is furnished below:

The available Input Tax credit of IGST is utilized by Rhonda Motorcycles as follows:

As shown above:

  • Rhonda Motorcycles has IGST input tax credit of 55,000 and tax liabilities of IGST ₹10,000, CGST ₹30,000 and SGST ₹30,000
  • As prescribed by GST Law, IGST Input credit needs to be utilized first to set off IGST tax liability. The remaining ITC can be used to set off CGST and then against the SGST liability, in that order.
  • Rhonda Motorcycles first utilizes IGST ITC to set off IGST liability of 10,000
  • Remaining IGST ITC credit, ₹45,000 (55,000 – 10,000) is used to set off CGST liability of 30,000
  • Now the remaining IGST ITC of ₹15,000 (30,000 – 15,000) is used to set off SGST liability to the extent of 15,000.
  • Now, after utilization of Input credit available of ₹15,000, the SGST liability of Rhonda Motorcycles is 15,000

2. Utilization of CGST and SGST

Rhonda Motorcycles procures headlights from Tier-1 ancillary Lomax Industries, and sells to its dealer Dev Automobiles based out of Gurgaon, Haryana

The detail of transactions effected by Rhonda Motorcycles is furnished below:

The available Input Tax credit of SGST and CGST ₹ 2,00,000 (1,00,000 + 1,00,000) is utilized by Rhonda Motorcycles as follows:

As shown above, the total liability of Rhonda Motorcycles is ₹10,000.

  • Rhonda Motorcycles have Input tax credit of 1,00,000 each against CGST and SGST.
  • As prescribed by Law, Rhonda Motorcycles first utilized ITC of CGST 1,00,000 to set off CGST liability of 1,05,000 (80,000+25,000). After this adjustment, CGST liability is 5,000 (1,05,000 – 1,00,000).
  • Now, SGST input credit of 1,00,000 is set off against SGST liability of 1,05,000 (80,000+25,000). After setting off SGST input credit, 5,000 (1,05,000 – 1,00,000) is the SGST liability.
  • After utilizing the available input credit of both CGST and SGST, the tax liability of Rhonda Motorcycles is 10,000 (CGST liability 5,000 + SGST liability 5,000).

3. CGST and SGST are not be interchangeable

Let us consider a scenario where Rhonda Motorcycles has available carry forward balance of SGST Input credit of ₹12,000

During the same month, Rhonda Motorcycles has the following outward supply:

As shown above,

  • Rhonda Motorcycles utilized SGST Input Credit of previous period ₹12,000 to set off SGST liability of current period ₹10,000
  • After this set off, Rhonda Motorcycles has a balance SGST input credit of ₹2,000
  • As prescribed by the Law, excess SGST Input Credit for the period cannot be set off against CGST and vice versa.
  • Thus the CGST liability for Rhonda Motorcycles for the months is ₹10,000 even after SGST input credit of ₹2,000 is left unutilized.

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